VARs Make Moves To Navigate Uncertain Economy

Many solution providers have enjoyed the robust economy of the past several years, using profits to expand business both organically as well as through acquisition. However, with economic indicators increasingly worrisome--such as continuing high fuel costs and the ongoing turmoil in the credit markets--some solution providers are taking steps to better position their businesses in the event of a slowdown, or even a full-fledged recession.

Although VARs are not of one mind regarding the current business environment, they do agree that now is the time to take stock of business strengths and use them advantageously.

"I do think the U.S. is heading for—if it's not already into—a recession, driven by access to financial capital," says Joe Mertens, president of San Antonio-based Sirius Computer Solutions (VARBusiness 500 No. 77). "It's cyclical, and Sirius has weathered these in the past. Often, the big, well-run companies survive better off. We've come back stronger -- but no one wishes for it."

Not all VARs agree that the U.S. economy is tanking. Indeed, the most recent Purchasing Manager's Index for January rose from the prior month, signally not only stronger performance in the manufacturing sector, but also indicating a slowly growing economy.

"I don't know if we are heading toward a recession," said Shawn O'Grady, president of Boulder, Colo.-based Incentra Solutions Inc. (VARBusiness 500 No. 291). "We are still thinking our business is going to grow. Quite a bit of that is from the businesses we've acquired in the past 12 months. Those companies' customers now have access to a bigger portfolio, so because we're offering more, we are seeing an increase in sales productivity."

Buying smaller competitors is one way successful solution providers have expanded selection and service capabilities. Offering customers more options has meant increased business for Incentra: O'Grady said the VAR has added roughly 10 salespeople from the fourth quarter to the end of the first quarter of this year. And Mertens noted that he's seeing more VARs for sale right now. "They are playing off their strength of last year, but are concerned or worried about making it in 2008," he said.

Business Survival Strategies

Solution providers who still focus entirely or mainly on reselling hardware may be in for a rough year, many executives noted. Because margins are slim on products, expanding a services practice—or starting one—is a practical way to strengthen customer ties. But some solution providers say don't give up on the hardware sale, but rather combine it with a services offering. Customers often are eager to use the solution provider they used to procure the product to provide service.

"There is still a lot of hardware being sold, but the gross profit with services is much higher, say 50 percent in services vs. 5 percent with hardware," said Alan Weinberger, CEO of the ASCII Group Inc., Bethesda, Md., a consortium of 3,000 VARs worldwide. "Hardware prices are going down, while the prices of services are going up. Most of our members want to do the whole job though, because their customers want to know it's going to all work together. They're not going to lose on the deal by calling a distributor to partner with."